Mexico Moves on Energy in Economic Reset

In Interview, Pemex Chief Says Overhaul to Broadly Cut Costs

ENLARGE

Mr. Lozoya spoke with Mexico City staff last week after an explosion.
Agence France-Presse/Getty Images

By

David Luhnow and

Laurence Iliff

Feb. 13, 2013 5:53 p.m. ET

MEXICO CITY—For decades, Mexico's energy policy has largely boiled down to exporting oil for cash to fund state spending. Now the new government is negotiating with rival political parties to curb that practice and instead use state monopoly Petróleos Mexicanos to a different end: cheaper energy, said Pemex CEO Emilio Lozoya.

In an interview with The Wall Street Journal, the 38-year-old chief said the administration of President Enrique Peña Nieto was striving to overhaul tax and energy laws this year that Mr. Lozoya said would result in cheaper energy for consumers and companies that could drive a more competitive economy.

See Related Video on #WorldStream

Now, the Mexican government relies on Pemex, one of the world's biggest oil firms, for 35% of government spending, leaving the company with little left over to invest in areas like natural gas. Private companies, meanwhile, are largely barred from investing thanks to Mexico's nationalistic energy laws.

The result is an energy-rich country where companies often pay higher prices for energy than elsewhere. Mexico has large reserves of natural gas, for instance. But since Pemex doesn't invest enough in gas, the country imports gas from the U.S.—raising costs to Mexican firms as they try to compete with global players like China.

"Energy ought to be looked at on a competitive basis and not as a foreign-exchange generator," Mr. Lozoya said, pointing to a prospective investment boost in industries ranging from gas to petrochemicals to fertilizers.

Complicating matters, Mexico's oil output has slipped to 2.55 million barrels a day from a peak of 3.4 million in 2004, as easy oil in the Gulf is replaced by more difficult reserves of deep-water oil and heavy oil onshore. To boost production, the company will need more money, technology and know-how.

Changing Mexico's energy laws is widely seen as an important test for a country that captured the imagination of investors for linking its economy in a free-trade deal with the U.S. in the mid-1990s, but which saw its star dim to other emerging markets like China and Brazil in recent years.

For Mexico, beset by drug violence the past few years, such a move would send a powerful signal to investors, likely driving billions in foreign investment, economists say.

"This is all about regaining the reform momentum, and you don't see that that often in emerging markets today. Taking on those taboos, and those changes, it would re-establish the Mexican narrative as a reformer and be very positive," said Gray Newman, chief economist for Latin America at Morgan Stanley.

Change won't be easy. The oil nationalization in 1938, by Mr. Peña Nieto's own Institutional Revolutionary Party, is seen as a key event in Mexican identity. Some leftist lawmakers, Mexican contractors and even some foreign oil-service firms that work with Pemex on a fee basis might see change as a threat, analysts say.

The freshly appointed Mr. Lozoya, the youngest ever Pemex chief and who is seen as close to the president, was careful not to discuss specifics about proposed changes to energy laws in the Tuesday interview, saying it was up to Mexico's political parties. But he did point out that political parties here from left to right had already come together in recent months on topics like education and labor reform.

"Obviously, our challenge is we need to deliver on the pending reforms and governing responsibly over the next years, but I do see this as a very good opportunity for Mexico to retake a path of higher productivity and higher economic growth," he said.

Mexico's conservative opposition, the National Action Party, largely favors a broader opening of the energy business to private investment, while the leftist Party of the Democratic Revolution has proposed a more limited opening for areas like refining.

Mr. Newman believes Mr. Peña Nieto may well deliver a broad-ranging reform. "I don't think the prospects for reform have been this strong in Mexico in over 20 years," Mr. Newman said.

The son of a former energy minister, Mr. Lozoya has had a tough start as head of Mexico's largest company, which had 2011 sales of $111 billion. An explosion at a Pemex office building at the company's Mexico City headquarters last month killed 37 workers. The company said the blast was caused by a buildup of methane in the building's cellar, but doesn't yet know what caused the gas to accumulate.

The investigation, led by the country's attorney general's office, will take a few more weeks, Mr. Lozoya said. "We are in mourning, but we're standing and looking forward, and working on our modernization plans," said the executive, who is the grandson of a revolutionary general and politician.

He pointed to the shale-gas revolution in the U.S., along with deep-water and heavy oil, as examples of how Mexico can benefit from new technologies that boost energy output, lower prices and create jobs.

Mexico may hold the world's fourth-biggest reserves of shale gas, according to the U.S. government. But Pemex has drilled only a few wells and not produced any gas. "Mexico ought to be producing more of its own gas, and eventually exporting it," Mr. Lozoya, a lawyer and economist who got his master's degree in public policy at Harvard said. "Clearly the geology that you have in some parts of the U.S. extends into Mexican territory. So it's a matter of just investing and getting it done."

Mr. Lozoya also envisions Pemex acting as a lever of development for the economy, spurring the development of a stronger oil service sector and promote new industries like ethanol.

"It is important we support medium-size companies, together with programs from national development banks, so they can access credit and be suppliers to Pemex, and make sure over the next few years that we develop a strong oil-servicing industry in Mexico that can grow and be regionally competitive," he said, speaking in English.

The government is considering slowly replacing additives like MTBE in gasoline with ethanol, he said. Pemex would act as the buyer and gatekeeper to the industry, Mr. Lozoya said.

Last year, Pemex had to abandon its second tender for ethanol to be used as a gasoline additive because the offers made were above the price the oil company was prepared to pay. Mr. Lozoya said Pemex would be prepared to pay "above average prices" to firms.

"Pemex may end up paying a little bit more, but it would have a positive impact on the environment and on jobs domestically, so it would be worth it," he said. "I foresee and I hope that in a couple of years we'll have a much stronger energy sector with many more medium-size companies present in it; and that Pemex becomes a much stronger development lever of the country."

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.